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RFS Advance Access originally published online on May 21, 2009
Review of Financial Studies 2009 22(10):4129-4156; doi:10.1093/rfs/hhp022
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© The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org.

Assessing the Costs and Benefits of Brokers in the Mutual Fund Industry

Daniel Bergstresser
Harvard Business School

John M. R. Chalmers
Lundquist College of Business, University of Oregon

Peter Tufano
Harvard Business School and NBER

JEL Classification: G2, G11, G24


  Abstract

Many investors purchase mutual funds through intermediated channels, paying brokers or financial advisors for fund selection and advice. This article attempts to quantify the benefits that investors enjoy in exchange for the costs of these services. We study broker-sold and direct-sold funds from 1996 to 2004, and fail to find that brokers deliver substantial tangible benefits. Relative to direct-sold funds, broker-sold funds deliver lower risk-adjusted returns, even before subtracting distribution costs. These results hold across fund objectives, with the exception of foreign equity funds. Further, broker-sold funds exhibit no more skill at aggregate-level asset allocation than do funds sold through the direct channel. Our results are consistent with two hypotheses: that brokers deliver substantial intangible benefits that we do not observe and that there are material conflicts of interest between brokers and their clients.

We have received very valuable guidance and comments from Sean Collins, Henrik Cronqvist, Ro Gutierrez, Charles Hadlock, Sarah Holden, Chris James, Woodrow Johnson, Wayne Mikkelson, Avi Nachmany, Kasturi Rangan, Brian Reid, Jon Reuter, Nancy Rose, seminar participants at the University of Arizona, Arizona State University, UC Berkeley, University of Cologne, Michigan State, Stanford, the University of Oregon/Journal of Financial Economics Conference on Delegated Portfolio Management, the ICI Academic/Practitioner Conference, the 2006 American Finance Association Meetings, and from staff members of the Investment Company Institute and National Quality Review, along with representatives of various fund companies. We thank Financial Research Corporation, Morningstar, Strategic Insight, and Ken French for sharing data with us. The comments in this paper do not reflect the views of any of these organizations. We thank the Harvard Business School Division of Research, MIT and the University of Oregon for providing funding for this project.


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